[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
HIPC DEBT RELIEF: WHICH WAY FORWARD?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL
MONETARY POLICY, TRADE AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
APRIL 20, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-79
U.S. GOVERNMENT PRINTING OFFICE
94-515 WASHINGTON : DC
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Domestic and International Monetary Policy, Trade and
Technology
PETER T. KING, New York, Chairman
CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice Chair BERNARD SANDERS, Vermont
JAMES A. LEACH, Iowa MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware MAXINE WATERS, California
RON PAUL, Texas BARBARA LEE, California
DONALD A. MANZULLO, Illinois PAUL E. KANJORSKI, Pennsylvania
DOUG OSE, California BRAD SHERMAN, California
JOHN B. SHADEGG, Arizona DARLENE HOOLEY, Oregon
MARK R. KENNEDY, Minnesota LUIS V. GUTIERREZ, Illinois
TOM FEENEY, Florida NYDIA M. VELAZQUEZ, New York
JEB HENSARLING, Texas RAHM EMANUEL, Illinois
TIM MURPHY, Pennsylvania CHRIS BELL, Texas
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
C O N T E N T S
----------
Page
Hearing held on:
April 20, 2004............................................... 1
Appendix:
April 20, 2004............................................... 31
WITNESSES
Tuesday, April 20, 2004
Flood, Gerald, Counselor, Office of International Justice and
Peace, United States Conference of Catholic Bishops............ 11
Hart, Thomas H., Director, Government Relations, DATA (Debt, AIDS
and Trade for Africa).......................................... 8
Melito, Thomas, Acting Director, International Affairs and Trade,
General Accounting Office...................................... 7
APPENDIX
Prepared statements:
Biggert, Hon. Judy........................................... 32
Oxley, Hon. Michael G........................................ 34
Bachus, Hon. Spencer......................................... 36
King, Hon. Peter............................................. 39
Lee, Hon. Barbara............................................ 41
Waters, Hon. Maxine.......................................... 43
Flood, Gerald................................................ 45
Hart, Thomas H............................................... 54
Melito, Thomas............................................... 79
Additional Material Submitted for the Record
Melito, Thomas:
Written response to questions from Hon. Judy Biggert......... 98
HIPC DEBT RELIEF: WHICH WAY FORWARD?
----------
Tuesday, April 20, 2004
U.S. House of Representatives,
Subcommittee on Domestic and International
Monetary Policy, Trade, and Technology,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:30 p.m., in
Room 2128, Rayburn House Office Building, Hon. Judy Biggert
[Vice Chair of the subcommittee] Presiding.
Present: Representatives Biggert, Feeney, Oxley, Maloney,
Frank, and Bell.
Mrs. Biggert. [presiding] The Subcommittee on Domestic and
International Monetary Policy will come to order. It is my
pleasure to have witnesses here today and to welcome all of you
to today's hearing on HIPC, or highly indebted poor countries,
debt relief. We are here today to hear testimony and encourage
discussion of a report released last week by the General
Accounting Office concerning the possible cost of the enhanced
HIPC program. The Financial Services Committee under the
leadership of Chairman Oxley and Ranking Member Frank requested
this report so that the members of this committee could have a
better sense of the possible costs of the enhanced HIPC
initiative.
I might add that you might have noticed that I am not
Chairman Peter King; I am the Vice Chair, Judy Biggert. Mr.
King will have an opening statement for the record but he could
not be here today.
[The prepared statement of Hon. Peter T. King can be found
on page 39 in the appendix.]
The GAO report presents some very troubling estimates. It
indicates that if HIPC countries are to benefit long term from
their debt forgiveness, they are likely to need between now and
the year 2020 significant continued assistance from the
international lending community. In particular, the GAO
estimates that an additional $153 billion will be needed in
development assistance and another $215 billion will be needed
to, and I quote, ``fund export earnings shortfalls.'' This
would all be in addition to an expected $8 billion in debt
relief likely to be needed when countries reach their
completion point and the topping-up portion of the HIPC debt
relief program is triggered. The grand total is $375 billion
through 2020.
The GAO also tells us that these are conservative estimates
that could easily rise. Of course the estimate is a global
number. If the past is any guide, the United States could be
called upon to contribute a portion of the estimate, about 12
percent. This may be a small portion, but it represents a large
number, $52 billion over the next 18 years. If the GAO numbers
are on the mark, this would probably work out to $2.8 billion
per year to U.S. taxpayers. I probably am not the only Member
of Congress that would question the wisdom of allocating that
kind of funding for the next 18 years without further serious
discussion and consideration.
This GAO report will generate serious discussion. There
will be questions about its assumptions and methodology. People
rightly will point out that there exists no formal commitment
from the multilateral lending banks or donor countries to make
up for export earnings shortfalls. People rightly will point
out the difficulty of accurately estimating development
assistance needed by the HIPC countries for the next 18 years,
especially if one assumes business as usual with no change in
lending practices.
Finally, people will question whether it is appropriate or
correct to assume that export earnings and HIPC country
exposure to export and commodity price volatility will remain
more or less the same.
I come from Chicago where commodities markets for years
have helped our farmers hedge exposure to the same kind of
commodity price volatility that complicates development
assistance. I understand that the World Bank is exploring how
to make better use of the commodities derivatives markets to
help poor countries reduce the exposure their economies and
export sectors have to price volatility. I also understand the
World Bank is looking at how in the future it might approach
lending decisions differently in order to prevent a linear
accrual of debt burdens.
And so I welcome this GAO report for the questions it
raises. It gives Congress and other policymakers a sense of how
expensive it could be if current lending and business practices
in the development community do not change. It provides us with
a concrete sense of the magnitude of the task at hand. It also
provides a good basis for development experts to debate how
further development assistance should be conducted in the
future. And it raises additional questions that are not limited
to the following: Does it make sense to continue lending to
poor countries in all circumstances? What limits on lending
should occur? What is the appropriate role of grants? Is it
fair to refer to new grants as debt relief? How can developed
donor countries facilitate policy changes and enhance access to
modern financial hedging instruments that can help support
countries' development choices? And finally, what can debt
relief reasonably be expected to achieve and is it asking too
much for debt relief to resolve broader development problems?
Debt relief under the HIPC program already has begun to
improve lives in impoverished countries. I look forward to
hearing from our witnesses about what specific progress has
been made. I also look forward to a spirited discussion of how
to facilitate progress within HIPC countries. We want to learn
from the failures of development lending in the past and
explore the availability of new approaches that can help
countries develop more responsibly in the future. I personally
am not convinced that providing billions of dollars to support
export shortfalls is a good use of anyone's resources,
especially when other alternatives might exist to help
countries develop more efficiently functioning markets.
The GAO report makes clear that a failure to identify a
delineation between debt relief, property reduction, and
development assistance goals will be costly for U.S. taxpayers
and people all over the world.
With that, I will recognize the Ranking Member, Mrs.
Maloney from New York, for an opening statement.
[The prepared statement of Hon. Judy Biggert can be found
on page 32 in the appendix.]
Mrs. Maloney. I will defer to the ranking leader, Mr.
Frank, if you would like to open and I will follow you.
Mr. Frank. I thank my colleague. I appreciate the chairman
of the full committee's accommodating us by having this
hearing. We tend when we have hearings to focus on problems and
criticisms in areas where we can do better, which is
appropriate, but sometimes the underlying reality gets lost.
The underlying reality has been that this has been quite
successful.
I appreciate the fact that two witnesses from the NGO
sector, who are both representative of organizations that did a
great deal to get us here, recognize this. There are some real
concrete improvements for some of the poorest people in the
world that came out of the HIPC.
Secondly, I don't want the HIPC criticized for what it was
not intended to do. Particularly the $375 billion figure is a
figure well within reason but not to carry out--and the GAO
didn't suggest that--the specific goals of the HIPC, of the
highly indebted poor countries. The fact is, a very small
amount is needed in relative terms for that. The 375 is a very
worthy goal, but it is not the case that if we don't get $375
billion--and I think the world could afford it over that 30-
year period--that somehow this would be a failure.
The next point I want to make is--and let's be very clear
when we talk about debt relief--we are not talking in any
realistic sense about letting people who incur debts in any
morally relevant sense out from under. The debtors here are
countries, and in almost every case the residents of the
countries were the victims of those who incurred the debts.
This is not a case of individuals going out and spending
recklessly, and now saying I don't want to pay my debts. As a
matter of fact, many of us in the West have more responsibility
for these debts than the people who are now bearing their
burden, because it was in many cases the governments in the
West, seeking in some cases to pursue geostrategic goals, who
helped these countries incur the debt. That ought to be very
clear. This is not one of those cases where we are letting
people off a hook that they got themselves onto.
We have some of the poorest people in the world who have
been twice victimized by bad governance; one, by the abuses
they suffered during the period of those governments being in
power, and secondly by the long-lasting burden of the debts
those governments incurred from which the people in the
countries very often got no benefit.
We are in the process of trying to reduce that debt. That
does not solve all the problems. I am concerned about what
seems to be an instinct to be negative far beyond what is
required. The Department of Treasury put out a report in
October of 2003, comments on proposed modifications to the
enhanced heavily indebted poor countries. It responded in part
to legislation that has been suggested by some of the
organizations, the gentleman from New Jersey (Mr. Smith) and I
and others worked on to try and talk about going further. I was
particularly disturbed on page 8 to read the following quote
from the Treasury's report: As highlighted in the World Bank's
operations evaluation department's evaluation of the HIPC
program, continued focus on HIPC and debt relief has been a
distraction in terms of the greater emphasis needed on well-
defined economic growth strategies in these countries. The OED
report stressed that HIPC debt relief is not a panacea, and
that given institutional capacity constraints in the HIPCs,
debt relief is not an efficient way of achieving desired social
sector outcomes.
Those comments are inaccurate, they are damaging, and I do
not regard them as having been made in good faith.
It is true that the OED report stressed that debt relief is
not a panacea. I am prepared to ascribe to the general
statement that nothing is a panacea. I have never seen a
panacea. Maybe they exist somewhere. The role of panaceas is to
be a stick with which people can beat things that they are in
favor of and can think of nothing substantively bad to say
about them.
Of course it is not a panacea. No one ever said it was. It
is helpful, as we will hear again from some of these witnesses.
While there are some points of improvement here, I very
much regret the negative spirit in which Treasury writes these
comments. When I saw that, I was troubled and went and got the
World Bank's report. That simply does not accurately convey
what the World Bank's report said, and I would hope that the
Treasury would be willing to correct that.
Just a couple of last points. One debate where I do agree
with Treasury and with this administration, we had a year ago--
I hope it is over by now, I think the witnesses are on the
right side--for some reason when the administration proposed
that we substitute grants for loans to poor countries, some of
my ideological allies, not used to ever agreeing with this
administration, objected. I think the sides got switched there
and people got--it is like those old comedy routines where
people are saying yes, no, yes, no; and somebody says no and
the other guy switches to yes.
Of course grants are better than loans. Improvident grants
aren't good. Improvident loans aren't good. But everything else
being equal, grants make more sense than loans when you are
trying to keep people from getting into debt. I think we should
be moving more in that direction, both with the multilateral
institutions and bilateral institutions.
Finally, I agree, and Mr. Hart makes this point: We ought
to be going beyond that with regard to debt relief, and in
particular I believe we should be working with the multilateral
institutions, particularly the World Bank and the IMF, to get
them to give the same degree of debt relief that was given
bilaterally. After all, the multilaterals are in fact the sum
of the bilaterals. They are not independent entities that make
their own money. They get money from elsewhere.
Particularly with regard to the IMF--and I want to pursue
this, and I would ask people to join me--they did some
monetization of their gold and were able to pay for some debt
relief. They can go further. I don't know if we can get 100
percent. It is harder with the World Bank than the IMF to come
up with a funding source, but there is no reason why the IMF
should not now be pressed to go back into this process of
monetizing some of their gold which is undervalued and use some
of those proceeds to give greater debt relief. That is one of
the specifics that comes out of this for me.
Madam Chair, I thank you and I thank the Ranking Member of
the subcommittee for her recognizing me.
Mrs. Biggert. I thank the gentleman.
The gentleman from Ohio, the Chairman of the Committee on
Financial Services, is recognized for an opening statement.
Mr. Oxley. Thank you, Madam Chairwoman. Thank you for
chairing this hearing today on an important issue for the
global community. Last year, Ranking Member Frank and I
requested that the GAO analyze financing issues associated with
the initiative led by President Bush, at the Group of Eight
level, to enhance debt relief for the most indebted countries
in the world. We also asked the GAO to identify options for
providing additional relief to help countries achieve debt
targets, debt sustainability and lower debt service burdens.
Providing humanitarian relief to the world's poorest
nations is a duty of the United States and developed nations
around the globe. The question is not whether to provide
humanitarian aid but how to use the taxpayers' money most
effectively in our quest to lift these nations from the depths
of poverty.
I look forward to receiving the GAO's testimony this
afternoon as well as the reaction to the report from two
leading organizations, DATA and the Catholic Conference. The
HIPC initiative has already had a positive impact on the lives
of real people around the globe. Our witnesses will provide
some details on how funds within HIPC countries have been
reallocated away from debt service and towards funding
education and inoculation programs. I also understand that the
process within HIPC countries for identifying how these funds
should be allocated is strengthening democracy and civil
society participation in government decision-making.
While there is a long way to go in many of these countries
towards full democracy, these are encouraging first steps.
However, HIPC debt relief is a limited tool. It seeks merely to
decrease debt service burdens for the poorest countries on the
planet. It identifies as goals, but not commitments, broader
ideals such as reducing poverty and increasing export earnings
within these countries.
Today's GAO report is controversial because it attempts to
estimate the costs that could be associated with achieving
these broader goals. The estimates in this report are sobering.
GAO estimates that the cost of achieving both debt relief and
economic growth targets in HIPC countries could be at least
$375 billion between now and 2020 in present value terms. Even
if the U.S. portion of this amount is as small as 20 percent,
this is still a serious amount of money that will cause
policymakers to consider carefully and strategically
development assistance strategies.
I welcome this report because it will require policymakers
and development experts alike to devote renewed attention to
distinguishing debt relief from development assistance. It also
identifies the possible cost of continuing to do business as
usual in the multilateral development banks. By assuming that
business practices in the banks do not change and by assuming
that export growth in HIPC countries will not be materially
enhanced in the future, the GAO report shines a spotlight on
the need for donor countries, development banks, and HIPC
countries to renew efforts to find new ways of delivering
development assistance, so that in the future poor countries do
not amass crushing debt burdens.
I am encouraged that the World Bank is already thinking in
these terms. In a February 2004 report on debt sustainability
in low-income countries, it explores the possibility of
countries using market mechanisms such as derivatives markets
to hedge their exposure to commodity market volatility. It is
actively considering a new framework for lending to low-income
countries that would limit the amount of debt a country could
acquire. These are encouraging developments. As we discuss HIPC
countries' need to expand and diversify their export sectors, I
would also like to underscore the importance of reviving the
Doha round of trade talks. Reduced trade barriers will provide
all countries with opportunities for growth and development.
I look forward to today's testimony and continued efforts
to enhance the effectiveness of international development
assistance. I yield back the balance of my time.
Mrs. Biggert. The gentleman yields back.
[The prepared statement of Hon. Michael G. Oxley can be
found on page 34 in the appendix.]
The gentlewoman from New York (Mrs. Maloney) is recognized
for 5 minutes for an opening statement.
Mrs. Maloney. Thank you very much. In the interest of time,
I will request unanimous consent to place my comments in the
record and merely state that I am looking forward to the
panelists' statements on the new GAO report of the HIPC
program.
We do know that where debt relief has been accomplished, it
has been very successful. I have a series of examples in my
statement that show where it has truly helped return children
to school and helped to vaccinate children in Tanzania, Uganda,
Mozambique, and others where debt relief savings were used to
really provide essential services and education and health care
to some of the world's poorest people.
I support this program. I look forward to the testimony. I
will place my 5-minute statement into the record. Thank you.
Mrs. Biggert. Without objection, all members' opening
statements will be made a part of the record. Are there further
statements?
Then we will proceed to the witnesses. Today we have Mr.
Tom Melito, Acting Director, International Affairs and Trade,
United States General Accounting Office. Welcome.
Mr. Thomas H. Hart, Director, Government Relations, DATA--
Debt, AIDS and Trade for Africa. Thank you for coming.
And Mr. Gerald Flood, Counselor, Office of International
Justice and Peace, United States Conference of Catholic
Bishops.
I am sure that most of you probably know the drill. Without
objection, your written statements will be made a part of the
record and you will each be recognized for a 5-minute summary
of your testimony. Then we will ask questions with a 5-minute
limit which we will try and stick to.
Mrs. Biggert. I will first recognize Mr. Melito for your
testimony.
STATEMENT OF THOMAS MELITO, ACTING DIRECTOR, INTERNATIONAL
AFFAIRS AND TRADE, UNITED STATES GENERAL ACCOUNTING OFFICE
Mr. Melito. Madam Chairwoman and members of the
subcommittee, thank you for the opportunity to be here today to
discuss GAO's assessment of funding challenges related to
heavily indebted poor countries, or the HIPC initiative. The
HIPC initiative is a joint bilateral and multilateral effort to
provide debt relief to poor countries to help them achieve
long-term growth and debt sustainability.
Our recently released report has two main findings. First,
the three key multilateral development banks we analyzed, the
World Bank, African Development Bank, and Inter-American
Development Bank, face a funding shortfall of $7.8 billion in
present-value terms under the HIPC initiative. We estimate that
the United States could be asked to contribute an additional
$1.8 billion to close this financing shortfall.
Second, we estimate that the 27 countries that have
qualified for debt relief may need more than $375 billion from
donors to ultimately achieve their economic growth and debt
relief targets by the year 2020. The United States may be asked
to contribute about $52 billion of this assistance.
Let me briefly provide some background on the HIPC
initiative and then describe in greater detail the results of
our work. The World Bank and IMF have classified 42 countries
as heavily indebted and poor. Three-quarters of these are in
Africa. The current cost for this initiative is about $41
billion in present-value terms. This will be funded almost
equally between bilateral and multilateral creditors. A major
goal of the HIPC initiative is to provide recipient countries
with a permanent exit from unsustainable debt burdens.
I will now turn to our main findings:
First, regarding the financing issues for the current
initiative, the three banks we analyzed face a funding
shortfall of $7.8 billion in present-value terms. The World
Bank has the largest shortfall at $6 billion. Despite
significant assistance from donor governments, the African
Development Bank has a financing gap of about $1.2 billion. The
World Bank and the AFDB have not determined how they will close
their financing gaps. The Inter-American Development Bank is
fully funding its HIPC obligation by reducing its future
lending by $600 million beginning in the year 2009. We estimate
that the United States could be asked to give an additional
$1.8 billion to close the $7.8 billion shortfall.
However, the total estimated funding gap is understated,
because the World Bank does not include costs for four
countries for which data are considered unreliable. In
addition, all three banks do not include estimates for topping
up, the additional relief that may be provided due to factors
such as a weakening in countries' economic circumstances. The
World Bank and IMF project that this additional relief could
cost from $877 million to $2.3 billion.
Let me now turn to our second finding, addressing
countries' long-term economic growth and debt sustainability.
The 27 countries that have qualified for debt relief may need
more than $375 billion in present-value terms to help them
achieve their economic growth and debt relief targets by the
year 2020. This amount consists of three components: first,
$153 billion in expected development assistance; second, $215
billion to cover lower export earnings; and, third, at least $8
billion to reach debt targets.
The World Bank and IMF project that these countries will
need $153 billion in development assistance after HIPC.
However, this is an underestimate because it assumes that
countries will achieve overly optimistic export growth rates.
Under more realistic historical rates, we found that 23 of the
27 countries are likely to experience higher debt burdens and
lower export earnings. This will lead to an estimated $215
billion shortfall over 18 years. These shortfalls are due to
weather and natural disasters, lack of access to foreign
markets, or declining commodity prices, all factors outside
these countries' control. If countries are to achieve economic
growth rates consistent with their development goals, donors
would need to fund the $215 billion. Otherwise, countries would
grow more slowly, undermining progress toward poverty
reduction.
Finally, we estimate that countries will need at least
nearly $8 billion to achieve their debt targets, both those
under the existing initiative and those the committee asked us
to examine. Based on its historical share of bilateral and
multilateral assistance, the United States may be asked to
contribute about $52 billion, or 14 percent of the $375 billion
in additional assistance.
Madam Chairwoman, this concludes my prepared statement. I
would be happy to answer any questions you or other members of
the subcommittee may have. Thank you.
Mrs. Biggert. Thank you very much.
[The prepared statement of Thomas Melito can be found on
page 79 in the appendix.]
Mrs. Biggert. Next, Mr. Hart, if you will proceed.
STATEMENT OF THOMAS H. HART, DIRECTOR, GOVERNMENT RELATIONS,
DATA, (DEBT, AIDS AND TRADE FOR AFRICA)
Mr. Hart. Thank you, Madam Chairwoman. Mrs. Maloney, Mr.
Frank, and other members of the subcommittee, I would like to
talk briefly about what has been achieved by the HIPC debt
relief program, which has been significant; how it can be
improved and how debt relief compares to other forms of
assistance, which is a lot of ground to cover in a short amount
of time, and I hopefully can react briefly to the GAO report at
the end. I will be happy to answer any questions you might have
as well.
First, let me say what a real pleasure it is to address
this subcommittee on this critical issue. While DATA, which
stands for Debt, AIDS, Trade, Africa, is a relatively new
organization, many of the people who helped found DATA started
their work during the Jubilee 2000 campaign. The best known of
whom, of course, is Bono from U2, who is the co-founder of our
organization. But also some of the most influential people in
the debt campaign are actually members of the U.S. House
Financial Services Committee. I would like to thank Mr. Leach,
Mr. Bachus, Mr. Frank, Ms. Waters, as well as many others of
this committee, who created the essential authorizing
legislation as well as the political momentum to approve the
HIPC initiative and get it funded here in the United States,
which then had the impact of triggering the international
agreement among the other donors.
Over the last 4 years, Congress has provided approximately
$860 million to the enhanced HIPC initiative, canceling both
U.S. bilateral debt and contributing to writing off
multilateral debt. And I am delighted to report that the
results of this program have been substantial. Twenty-seven of
the poorest countries in the world have now qualified, almost
all of which are in sub-Saharan Africa. These countries will
see their debt reduced by two-thirds, cutting $52 billion in
debt stock.
Other donors, in addition to the United States, have
provided $30 billion to finance this initiative. A new process
has emerged in which poor country governments must engage with
their civil societies to determine poverty reduction priorities
for their country and have increased ownership and transparency
within their governments. For development advocates like DATA,
very importantly, more than $1 billion annually in debt service
is now staying in these 27 countries to fight poverty.
And just a couple of brief examples: Uganda has used
savings from debt relief to more than double school enrollment
to 94 percent, which has contributed to that country's
remarkable decline in HIV/AIDS rates. Mozambique has vaccinated
children against tetanus, whooping cough, and diphtheria as
well as built and electrified schools. And Cameroon has used
debt savings to launch a national HIV/AIDS plan for prevention,
education, testing and mother-to-child transmission.
So, being the Financial Services Committee, what kind of
return on this investment have you got? For an investment of
less than $1 billion over the course of several years, the U.S.
has leveraged $30 billion of donations from other donors and
canceled $50 billion of debt stock, a significant clearing of
the books of decades-old debt. It also has freed up $1 billion
a year in debt service which is now building schools, clean
water wells, and AIDS prevention programs.
That said, of course, the program could be improved. The
debt service relief has been rather uneven among the 27
countries, some receiving 5 percent debt service to revenue,
others up to 34 percent. We are hoping that we can even out
some of the benefits in the program.
Secondly, 27 countries is wonderful, but not enough. There
are many countries who could benefit from debt relief. As we
have seen recently in Iraq, any reconstruction and development
package should include debt relief as a way of easing financial
pressure on a burdened country.
And thirdly, even though these countries have saved $1
billion annually in debt service, they are still paying $2.5
billion annually, mostly to the World Bank and IMF. These are
critically needed resources for putting girls in school and
fighting AIDS.
So it is with some of these improvements in mind that Mr.
Frank, along with his colleague Mr. Smith from New Jersey here
in the House, and in the Senate, Senator Santorum and Senator
Biden, drafted legislation to try to address some of these
concerns. Very quickly, it proposed a simple change to the HIPC
program. Instead of using 150 percent debt stock to export,
which is the measure the current HIPC initiative uses to
measure debt, it proposes to change so that no country spends
more annually in debt service than 10 percent of its general
revenues, or, in the case of a country with a high AIDS burden,
5 percent. That would more closely link debt relief to a
country's ability to pay and limit some of the volatility that
changing exports have had on debt sustainability. It would
increase the amount of money these countries have for poverty
reduction by over $430 million, a 50 percent increase in the
benefit to these poor countries for only a minimal cost.
This proposal was actually passed into law last year with
the Global AIDS Act, but the Administration has not yet
implemented its provisions. I hope one of the outcomes of this
hearing will be to encourage the Administration to do so.
In my last minute of time, I want to relate how debt relief
works as part of a development package. Of course debt relief,
as Mr. Frank noted, is not a panacea. It never was designed to
be. Poor countries need additional aid and much better trade
terms with rich countries, something that speaks to the GAO's
very large gap in export financing that they have in their
report. But debt relief under HIPC does have several features
that make it an effective form of assistance.
(1)It coordinates donors. Like any bankruptcy, all the
donors have to move together and that eases the burden of
paperwork, financing, and accountability that poor countries
have to deal with.
(2)It promotes country ownership. The HIPC initiative, as I
mentioned earlier, asks members of civil society to design a
poverty reduction plan, creating better consultation by the
countries themselves as well as highlighting country priorities
rather than donor priorities.
(3)Debt relief gives untied aid, meaning the countries make
their spending decisions themselves.
(4)And, as noted, debt relief leverages far greater sums
because it coordinates the donors together. As noted, every
U.S. taxpayer dollar is leveraged 30 times by other donors.
Very, very briefly on GAO, Tom is an old friend so he will
know the spirit in which I say this, but this was GAO's shock-
and-awe strategy. Even though this was a report intended to
address some of the challenges of debt relief, he ends up
bringing in export financing and development assistance as a
way of achieving certain growth goals. While DATA firmly
supports a robust and comprehensive development financing
package for the poorest countries, to somehow imply that the
debt relief programs shoulder that burden is simply not going
to happen.
One of the factors that I have pointed out, the largest gap
in financing here that the GAO points out is in export
financing. I know this will be a controversial suggestion to
Congress, particularly during an election year, but instead of
actually costing the U.S. taxpayer money, we could in some
respects solve this problem by saving taxpayer money. U.S. farm
subsidies contribute dramatically to Africa and other poor
countries' inability to export their goods to the Western
world. We spend billions of dollars subsidizing our farm
products, which make them very, very cheap and make it very
difficult for poor countries to compete globally. In many
instances also those products are actually dumped on markets in
poor countries. Therefore, that export gap could be closed by
other means other than U.S. taxpayer dollars.
The shortfall in debt relief that is mentioned, the $8
billion, could largely be addressed. It is partially being
addressed currently--there is a $650 million shortfall, of
which the United States has agreed to provide $150 million,
half of which has already been appropriated by Congress. The
other half has been requested for 2005. It is a very small
amount. The second part of that shortfall is largely to the
World Bank. This is because to date, the World Bank has taken
its substantial annual profits and transferred some of those
profits to the HIPC initiative. It has done that to date and is
now proposing to stop doing that. That is the reason why the
shortfall exists.
I hope some of these issues can be considered as the
committee moves forward. Thank you very much.
Mrs. Biggert. Thank you very much.
[The prepared statement of Thomas H. Hart can be found on
page 54 in the appendix.]
Mrs. Biggert. Mr. Flood, you are next.
STATEMENT OF GERALD FLOOD, COUNSELOR, OFFICE OF INTERNATIONAL
JUSTICE AND PEACE, UNITED STATES CONFERENCE OF CATHOLIC BISHOPS
Mr. Flood. Thank you, Madam Chairman. Madam Chairman,
members of the subcommittee, on behalf of the United States
Conference of Catholic Bishops, I would like to thank the
members for the opportunity to testify here today. Debt relief
for poor countries has been a high priority for the Bishops
Conference and of the relief and development agency, Catholic
Relief Services, for many years. In my testimony, I will be
focusing on a number of issues at a level of technical detail
which the Bishops would not normally address and on which they
therefore would not have a position, as I think you can
understand. Thus I am offering my testimony primarily as a
former development agency official who has worked on debt and
related issues with both the World Bank and the Bishops
Conference for many years.
First I would like to reiterate what Tom Hart said and just
to acknowledge my great appreciation and gratitude for the
leadership and the long and faithful support provided by many
members of this committee in favor of debt relief for heavily
indebted poor countries, particularly Mr. Leach, Mr. Bachus,
Ms. Waters and Mr. Frank.
In my written testimony, I discuss six areas where the HIPC
program and related activities seem to be producing good
results for the beneficiaries, including, among others,
substantial increases in expenditures for poverty reduction,
prudence in new borrowing and improved processes for tracking
poverty reduction expenditures. Time won't permit me to go into
each one of these, but what I would like to do is just
highlight one of them and then as is our wont, as suggested by
Mr. Frank, to go into some of the deficiencies for the program
as I see them, but briefly.
The first point I want to make on the positive side is that
the poverty reduction strategy process, or the PRSP which was
introduced as an integral part of the HIPC debt reduction
program, has facilitated an active, unprecedented role for
civil society groups in monitoring of expenditures for poverty
reduction. Catholic Relief Services reports impressive examples
of civil society participation in a number of countries
including Bolivia, Uganda, Malawi and Zambia. They have formed
active and effective debt monitoring organizations which
actually examine and track how debt relief expenditures are
being spent in their countries. This shows that in many
countries the procedures instituted under the HIPC program are
helping to strengthen democratic processes in places where
historically weak governance has often led to serious neglect
of the needs of the large majority of the very poor and
vulnerable citizens.
On the other side of the ledger, although the program is in
its fifth year of completion, only 11--and I understand
yesterday that number is up to 12--of the 27 beneficiary
countries have reached their completion point. This is the
point at which they become irrevocably entitled to full debt
relief. Zambia is a case in point. My understanding is that the
completion point is being held up because pressures to increase
salaries led to an overshooting of the wage bill target agreed
with the IMF. This is a very complex issue. A recent World Bank
report analyzed the wage bill problem. It says that low
remuneration in the public sector is a major factor
contributing to problems of poor productivity, motivation,
recruitment and retention. At the same time, the wage bill in
Zambia has remained large relative to overall government
expenditures, thereby crowding out operational expenditures.
The World Bank report outlines a broad strategy for
addressing the issue. But the challenge is an enormous one: how
to make wages sufficiently remunerative to attract and retain
qualified staff while at the same time minimizing the cost. In
the meantime, Zambia continues to be plagued by a heavy burden
of past debt. In fact, the fiscal bind which Zambia finds
itself in can be attributed in large measure to its heavy debt
service obligations. According to the latest projections,
Zambia's debt service will be an extremely high 31 percent of
government revenues in 2004. The delay in granting full debt
relief is restricting the ability of HIPC countries to create
the kind of fiscal space so important for moving ahead to
address in a more effective way the human needs of their
people.
The IMF and World Bank should reexamine the conditions for
reaching the completion point, particularly those that are
unrelated to assuring that the debt relief savings will reach
the poor.
Tom Hart has already covered the next several points and I
don't want to waste the committee's time by repeating things
which I am in full agreement with. I just want to thank very
much Representatives Chris Smith and Barney Frank, and Senators
Santorum and Biden for their leadership in introducing the bill
which is now the new legislation which Tom Hart discussed.
So let me talk briefly about the GAO report. This report
makes a very important point, which is that even if the HIPC
program is fully financed, substantial additional external
assistance will be required to enable HIPC countries to achieve
growth and poverty reduction targets. Debt relief is not--a
well used word--panacea. Even if the existing debt of HIPC
countries is reduced to zero tomorrow, it will not end poverty.
The problem is too complex and deep seated for that. It must be
addressed first and foremost by the countries themselves, with
their governments and people working together on a variety of
fronts for the common good. But they are too poor to do it
alone. They need additional aid and support from the wealthier
countries.
There are questions of course that arise with respect to
the numbers that are used in GAO's report, but let me make one
additional point and that is that the GAO scenario assumes that
the export shortfall they project will be made up entirely by
aid. This overlooks an important element of the development
agenda--external trade, as Tom Hart indicated. Developing
countries can achieve important benefits by more open trade
provided that it is also fair trade. The World Bank estimates
that trade barriers in Europe, the United States, and Japan
cost poor nations more than $100 billion a year.
One final point. The GAO estimates that almost all the 27
HIPC countries could achieve debt sustainability if
multilateral creditors converted an average of one-third of
their new loans to grants. In fact, in a statement by President
Bush in 2001, he said that IDA should convert about half of its
loans into grants. The Bishops Conference supported the
expansion of IDA's grant authority in IDA 13. But they also
emphasized the importance of donors beginning to make
contributions very soon to offset the loss of reflows of loan
payments to IDA which constitute close to 40 percent of their
resources for new lending. Otherwise, the necessary
contributions would mount quickly to unfeasible levels and
cause IDA to sharply cut back its assistance to the world's
poorest countries. This will be an important issue in the
negotiations of IDA 14 which have just begun. Thank you.
Mrs. Biggert. Thank you very much.
[The prepared statement of Gerald Flood can be found on
page 45 in the appendix.]
Mrs. Biggert. We will now proceed with the questions. I
will recognize myself for 5 minutes.
Mr. Melito, your report identifies a range of development
and export support lending that will be needed between now and
2020 for HIPC countries to meet the targets identified in their
PRSP. Do your estimates take into account the impact that
programs such as the Millennium Challenge Account, the Global
Fund for HIV/AIDS, TB and Malaria, the USAID, and UNCTAD will
have in helping to meet some of the development needs you
identify in your report?
Mr. Melito. In our report, we are using World Bank and
IMF's 20-year projections which make the assumption, which we
follow, that these countries are on a reform program that is
supported by the donors, which would include bilaterals such as
the United States as well as multilaterals. We hold that
assumption constant. So U.N. reforms, World Bank reforms, U.S.
reforms, would all be assumed to be followed. This would then
result in high GDP growth rates, which we hold constant. So
yes.
Mrs. Biggert. So yes?
Mr. Melito. We are assuming those sources of financing are
there and the reforms that those particular programs are
looking for are being followed.
Mrs. Biggert. Have you actually taken into account the
monetary amount, or is that just that these reforms will raise
the quality of the health, for example, of the people of those
countries?
Mr. Melito. Once again we have used the World Bank and
IMF's breakdown of development assistance, which doesn't go
into great detail. It has information on different
multilaterals, how much the World Bank will provide, how much
the other MDBs will provide. It also has very general numbers
on the bilaterals. It doesn't break it down to how much is
actually the U.S. share, and certainly not within the U.S.
Share how much would come from MCA versus regular development
assistance. We abstract from that. We are just taking the total
numbers they provide us.
Mrs. Biggert. For example, with the Millennium Challenge
Account, what would you say about that?
Mr. Melito. That would be one of many possible sources of
financing which could be used to help the HIPC countries as
well as other HIPC countries as we move forward. But it is not,
in the case of financing HIPCs, different from any of the other
sources. It is one of many possible options.
Mrs. Biggert. How about, then, the Global Fund for AIDS? We
put so much money into this program. I am trying to just figure
out if you would say, well, so much money is going to go to
this?
Mr. Melito. It is a very difficult thing to project out 20
years. We tried to put a lot of caveats in the report. We are
actually, for the most part, piggybacking on the World Bank and
IMF's projections, just changing some key assumptions and
seeing what the impact of those assumptions are. They are the
ones who estimated how much development assistance would come
to the countries. We don't actually change that number. We
leave that number as it is. So when we say that $153 billion is
expected in development assistance, that is the World Bank and
IMF's number. That is not our number. That number is about
equally distributed between multilateral assistance of about
$75 billion and about $78 billion for bilateral assistance. But
they don't actually break it down and say how much is coming
from the global fund, how much is coming from MCA or anything
else. And that is certainly not within the scope of what we
did. So we left that as is.
Mrs. Biggert. How do you determine the rate of growth each
year, how much of this is going to factor in for the years to
reach 2010?
Mr. Melito. The DSA has a number of optimistic growth
rates. We made a choice to keep the optimistic GDP growth rates
constant, because those are the rates which are geared towards
poverty reduction, with the notion that these countries will be
expected to strictly follow the reform programs which will
contribute to their ability to grow, and in exchange for
following reform programs, donors would provide them
assistance.
We also, though, looked at the fundamental--we considered--
weakness in one of their growth rates which is on the export
side. We think it is important to highlight that. While we find
that there is a $215 billion export shortfall, we still
calculate that these countries are going to raise quite a bit
of revenue from exports. It is not that we are wiping out their
export revenues. It is just that we bring a more realistic
historical perspective and our estimate is about 40 percent of
what the World Bank and IMF estimate. But we have reasons to
suspect the export levels. We are being hopeful on the GDP side
for the value estimated.
Mrs. Biggert. There has been recent research that has begun
to quantify how improvements in public health can drive
economic growth. With some of the written testimony and
testimony today on how inoculation and other health initiatives
have been supported by the HIPC initiative and these other
administration priorities, how can one assume that export
growth in the future will be consistent with the historical
experience?
Mr. Melito. The reason we are concerned about the export
growth rates is that a lot of the vulnerabilities come from
factors outside these countries' control. As we mentioned in
our statement, they rely heavily on a few primary commodities,
agriculture products like coffee or cocoa, minerals like
copper. Over the last 20 years, the prices of these items have
actually gone down over that time in real terms. They have wide
fluctuations which also hurt these countries. These countries
also have large weather extremes, other natural disasters. So
on the export side, they really have very little that they can
sell, and what they are selling has been going down in price.
For them to have good outcomes in exports, they need to
diversify their exports and probably moving into manufacturing,
which would be an important development goal, but it takes a
long time for them to reach that point.
Mrs. Biggert. Thank you. I recognize the gentlewoman from
New York.
Mrs. Maloney. I would yield to the Ranking Member of the
full committee.
Mr. Frank. I thank the gentlewoman.
Mr. Melito, one thing that I think may have caused some
confusion, when you talked about the $375 billion, which of
course $8 billion of that is for the HIPC--we ought to be
clear--the HIPC. To carry out what we started a few years ago
cost $8 billion. So the overwhelming majority of that is to get
to very, very good outcomes. We might say that $368 billion is
the price of a panacea which we claimed we were doing there.
But even there I think it may mislead some people unless we are
very explicit about something.
As I understand what you are saying, that is not $375
billion more than is currently planned. That includes $153
billion that is assumed foreign aid going forward. So even at
that, it is a $215 billion increment, currently planned amount,
over this period, is that correct?
Mr. Melito. That is so. We are explicit about that in the
report.
Mr. Frank. I understand that. I don't mean to impugn your
pride of authorship. But some people might wait for the movie
and not read every word in the report, so I wanted to get that
out. So we are talking not about $375 billion additional but
$215 billion additional to reach the point where they are all
in very good shape. I would love to get there, but I don't want
to scare people.
The only other thing I would ask about were exports. You
are right, exports are uneven but not with regard to
agricultural commodities but with regard to, you mentioned
copper and other things. We are currently in a situation where
with sanctions of the Chinese vacuum cleaner, some of those
things are going up. Do you assume that is going to end soon?
In fact, while export prices for raw materials might have been
going down a while ago, currently my reading is that a lot of
them are going up because China is putting such upward pressure
on them. Do you have any response on that?
Mr. Melito. Even over the last 20 years, there have been
periods of growth, but the overall trend has been downward.
Certainly some of the commodities may be turning around.
Mr. Frank. If the Chinese continue this?
Mr. Melito. Overall demand worldwide may be going up but
they are still vulnerable.
Mr. Frank. I agree. In fact, that also leads me to the last
point I want to make on this. That is, I have been struck, as
we have debated free trade over the years, that some of us who
have been concerned about the impact that unrestricted trade
without any labor or environmental rights would have on
particularly some of the industrial workers who have been
accused of being protectionists. In fact, as I think this
report makes clear, the greatest negative impact any public
policy in America has on our ability to help poor people is
America's agriculture policy. It is restrictive, it is
subsidized, and I find it odd that people who are strong
proponents of our agricultural policy, which I generally vote
against, which costs tens of billions of dollars and is quite
restrictive, are somehow allowed to call themselves free
traders.
I gather with regard to export growth that significantly
increasing the amount of agricultural product we allow to come
into the United States would be very helpful. Is that correct?
Mr. Melito. It is generally outside the scope of this
report, but we do highlight that the ability to sell their
products will obviously decrease this shortfall.
Mr. Frank. Would you say that agricultural products are a
large part of what these particular countries would be able to
sell?
Mr. Melito. Their primary commodities are generally
agricultural or metals.
Mr. Frank. Thank you. I think that is kind of an illogical
point here. The most protectionist, the aspect of American
economic policy that falls hardest on these countries is our
restriction on agriculture.
I guess finally I would say this. You don't seem to be too
optimistic about the impact of various free trade agreements
that the United States might be signing with these countries.
Have you taken that into account? Suppose the President and Mr.
Zoellick's trade agenda were put through. Would that increase
your optimism about their exports?
Mr. Melito. Certainly to the extent that markets would
open, that would increase their ability to achieve high growth.
Mr. Frank. But there is nothing in there. You wouldn't bet
on it?
Let me ask Mr. Flood with whom I generally agree, this one
point--and I did want to note that I think some of our liberal
friends were just wrong in their resistance to going to more
grants, although it does mean that you have to take advantage
of the reflows. But one point that was raised by Treasury and
some others, and I know I supported this amendment with Mr.
Smith but we did, I think, give Treasury an alternative. We
said either do this or come up with an alternative. I share
your disappointment that Treasury basically just blew us off
and sent back a report which I think unfairly denigrates the
HIPC and mischaracterizes what the World Bank said. But there
is the moral hazard thing. There is the perverse incentive
thing. How do we respond to that? I must say I am impressed
with that. Namely, that if you tell people that we will make
sure that their debt isn't more than a certain percentage of
their revenue, to some extent that gives them an incentive to
kind of push up their debt and reduce their revenue. Are there
ways that we can achieve the goal of reducing the burden of
debt and avoid those negative incentives, Mr. Flood?
Mr. Flood. I have never really understood that point too
well, because we have a situation where a country is paying,
let's say, 30 percent of its revenue currently in debt service.
Under the legislative proposal that was passed, the country
would then go to a situation where it is paying perhaps 5
percent of its revenues in debt service. Therefore, it is in
effect in a position where it makes more sense to go out and
raise revenues because fewer of its revenues are going to have
to be used up in providing funds for debt service.
Mr. Frank. What about if they are closer to the margins
where an increase might have a negative impact?
Mr. Flood. I think that the other thing is that this is a
retrospective program. It is not a prospective program. What we
are talking about is getting rid of old debt.
Mr. Frank. I know that it has been suggested that one of
the things you do is to have these be only as applied to the
past but that future either debt or revenue would somehow be
excluded from the calculation, Mr. Hart?
I am sorry. Go ahead, Mr. Flood.
Mr. Flood. I was going to say that I think in going
forward, I don't think that the countries can expect to have
repeats of HIPC every few years, which it seems to me would
create quite a moral hazard, that they wouldn't in effect be
responsible for the debt service of future lending because
somebody's going to always come around and forgive it. But if
you went to a grant system, which I think is really a very good
alternative, it will avoid that problem.
Mr. Frank. Mr. Hart?
Mr. Hart. I was going to respond to the first part of your
question, which is that Treasury has argued that somehow when
you have a debt service-to-revenue formula you are somehow
depressing--that you are creating an incentive not to collect
revenues. And it was in response to that that you and your
colleagues who passed the legislation gave Treasury the
flexibility to design another mechanism which achieved similar
results, including tying it to GDP, which has been an example
that Nancy Birdsall from the Center For Global Development has
recommended. That option is there for Treasury to pursue.
Mr. Frank. Let me say to Treasury that I would renew our
request that they give us more on this than they have. I think
there is a great deal of interest.
Just a last point on this, if I could, Madam Chair, and I
thank you for the indulgence. Unfortunately reflective of--I
don't know--a lot of things, we are more sparsely attended
today than if we were talking about richer people.
Mr. Frank. I can see how we can get the IMF to finance
greater debt relief. I think we need to do some more work on
how we get the World Bank to do that, because it seems we ought
to be going forward on that.
There was one suggestion that they raise the interest rate
on sort of middle-income countries. I do not think that works.
I do not think you want to make Mexico pay for Uganda. That is
not a good idea.
But any off-the-top-of-your-head suggestions about what we
can do with the World Bank? And that would be my last question.
Mr. Hart. Just briefly, ask the World Bank to do what it
has been doing for the last 5 years. As part of the enhanced
HIPC framework, the World Bank agreed to take net profits it
earns from interest on income--between $1.5 billion and $2
billion a year, in net profits. They then transfer that to
their pension plan and to other accounts. One of those accounts
that they transfer profits to is the HIPC trust fund.
They have been giving between $200 million and $300 million
a year as their part of contributing to writing off this HIPC
debt. They have agreed to do that until 2005.
Between 2006 and 2020, they have not agreed to do so, thus
creating that massive shortfall in funding that GAO referred
to.
Mr. Frank. So they just agree to continue this forward if
they could do that, and it would not cause shortfalls in the
other accounts?
Mr. Hart. It would at least substantially reduce that
shortfall.
Mr. Frank. Mr. Flood?
Mr. Flood. No, I just wanted to say that even when they are
contributing $240 million to the HIPC trust fund out of their
revenues, they are still able to increase their general
reserves by $2.4 billion. I mean they have a lot of leeway in
there.
Even with the continuation of the current level of
contributions to the HIPC, there will be still a gap, and I
think that really the $240 which they are currently doing has
to be considered the minimum as to what they can contribute
going forward.
Mr. Frank. So that would not get us to further debt? That
is just to finish up on HIPC?
Mr. Flood. That is right.
Mr. Frank. We have to work on that.
Mrs. Biggert. Thank you.
It appears that the gentleman from Massachusetts would be
in favor of another hearing at some point.
Mr. Frank. Yes, I would be.
Mrs. Biggert. To include Treasury and perhaps the World
Bank.
Mr. Frank. Yes, although, we did not ask Treasury. I do not
mean to be critical of Treasury, because they have been
cooperative. We had not asked them to come here.
But yes, I think because the World Bank will not testify,
but they could sit and listen, and maybe they are already doing
that.
Yes, I thank the vice chair. If we could get Treasury to
come back, or to come--it is not their fault today, we did not
ask them--but if they were to come and address this, that would
be helpful. And maybe the American ED, the American executive
director of the Bank, could accompany Treasury.
Mrs. Biggert. The gentleman from Florida is recognized for
5 minutes.
Mr. Feeney. Thank you very much, Madam Chairman.
I happen to be a new Member of Congress and, of course, a
new Member of the Committee. And this is my first experience
with HIPC, so I hope you will give me the grade 1 through 5 and
not the advanced level.
I want to ask first, Mr. Melito from the GAO, with respect
to your study, you named the donor nations that are eligible
for HIPC. You also I think we probably admit, as some of the
folks on the other side tried to point out earlier, that there
are huge variables when you start estimating the burdens that
these countries are going to have, all sorts of things, not
just gross domestic product increases but the value of specific
resources, whether it be oil or gold or commodities or
products, all sorts of political decisions that are made, not
just by that Nation, but by the world community. I think we
very much understand that.
One of the things I would be interested in knowing is,
historically, how some of these poor debtor nations got into
the condition they are in the first place. One of the things
that I would be specifically interested in, since it is
something we have an impact on, is what their history has been
over the last 3, 4, 5 decades in terms of receiving foreign
aid. What have we done with our foreign aid dollars to actually
help these folks acquire the types of governments and policies
that will lead them to economic prosperity?
I note that one of the key goals of HIPC is not just to
relieve debt. I mean, that is the symptom that we are
attacking, but it is to eliminate or reduce poverty and promote
economic growth. And I guess sort of the tongue-in-cheek
proposal from somebody who has been very disappointed in a 50-
year history of financial aid from America and other nations
and how little it has actually impacted the quality of life of
people there, I guess sort of the tongue-in-cheek proposal is,
have we thought about translating the Wealth of Nations by Adam
Smith into all of the different languages available and
providing it to the finance ministers and advisers and economic
professors in each of these countries?
Because my view of this is pretty simple. Our policies are
not designed to promote not just free trade but low taxation,
low regulation, the rule of law, property rights, both for real
and intellectual, that no amount of aid is going to be enough
to keep these countries out of deep trouble. So if I could--and
I will end early, Mr. Melito, because then I would like to have
the other panelists if I could, who are advocates for aid--I
would sort of like you to address your response to my monologue
here, to how we know when we are succeeding.
We really are trying to remodel what I have described as a
massive failure of foreign aid from America for the last 4 or 5
decades. By the way, the only exception is maybe some short- or
even long-term intelligence or military with strategic
advantages. If we are going to buy or bribe countries to be our
friends for a while, that would be a different discussion.
But to the extent our goal is economic growth and reduction
of poverty, I have been totally disappointed in the results
that foreign countries have gotten from our aid and that our
taxpayers have gotten as well.
Some of the things, Mr. Hart, that you point out that are
huge successes--and I do not mean to diminish the importance of
any of these--but I would like you to tie the ultimate goals of
HIPC programs, eliminating and reducing poverty and promoting
economic growth. You have twice as many people in schools in
Uganda. Are they teaching the right things to twice as many
students? You are measuring inputs there, and I am more
concerned if we are measuring outputs.
I think that, finally, and then I will end, if you can tell
me how you are measuring--and by the way, you talked about
disease control and AIDS. Africa is three-quarters of the
nations involved here. Famines come and go in Africa in a
tragic way, not every decade, but every year. Even when the
famine is eliminated, poverty is not, and economic prosperity
never, ever results on the African continent. And that is a sad
fact of life.
Finally, Mr. Flood, you have suggested that Malawai and
Zambia are examples of where HIPC may be making a difference,
but this is more of a suggestion on your part. Do you have any
empirical evidence that you can give us to that effect?
So with that, thank you very much.
Mr. Melito. I will just briefly talk a little bit about
history and let my colleagues deal with the effectiveness.
The causes for these countries getting these debt problems
is actually an ongoing issue of overly optimistic export growth
rates. Back in the 1970s, these countries received a lot of
commercial debt or debt from governments, including the United
States, at commercial rates, on the notion that they would be
growing rapidly. Well, they did not, and in the 1980s, they
ended up having very high levels of debt which they could not
pay.
That debt got slowly converted over time from bilateral to
multilateral debt, as they went to the concessional windows.
But this problem has been existing for a couple of decades, and
failure to reach high export growth rates would be one of the
main causes of this debt, going back since the 1970s.
Mr. Hart. Thank you, Congressman.
There is a lot of, many parts to your question, and I am
not sure I will do justice to all of them. Let my try.
First of all, I do not think it would be correct to say
that the last 40 years of development aid have been a
categorical failure. Life expectancy rates in the developing
world from World War II to the 1990s was actually increasing,
which is a real output, to use your word, of direct assistance.
Then HIV/AIDS began to take its toll, particularly in Africa,
and we have seen life expectancy decline.
That is not to say that I disagree with everything you are
saying. I do actually agree. I think we could do a lot better
with our development assistance. I think, actually beginning
with debt relief 5 years ago, began a trend toward several
things that have improved U.S. assistance and indeed the global
fight against poverty. One is that donors are acting better in
concert with one another. That does, in fact, have a real
impact on these countries.
I think also the ability of countries to leverage money
from one another increases the impact of assistance.
I think in no small measure the success, political success,
of debt relief and the results that we have begun to see, at
least the input that we have begun to see in these countries
with debt relief, have helped lay the groundwork for the
substantial increase in assistance for HIV/AIDS. Beginning with
Mr. Helms in the Senate who was a long-time critic of U.S. aid,
his support for debt relief and then HIV/AIDS helped begin to
turn the corner.
And I think that also has led to the Millennium Challenge
Account, which, in my view, is an historic rethinking of the
way we do development assistance--focusing large amounts of
resources on well-governed countries, countries fighting
corruption and promoting democracy. And we are firm supporters
of that program and look forward greatly to the Administration
implementing this program with haste, because we do think that
we will begin to really see the results that we are all hoping
for, as well as revealing the credibility of aid with the
American public and with policymakers.
Mr. Flood. In terms of aid effectiveness, I think that, for
one thing, we do not often really appreciate some of the
smaller improvements that are actually happening on the ground
at the micro level that do not get built up and put into the
global statistics. Because I remember when I was working for
the World Bank in Nigeria, I visited a rural community. What
was going on there is amazing, even though it will never appear
in any statistics anywhere, in terms of what was happening with
a group of maybe 500 people, something like that.
They had, through technical assistance, introduced new
varieties of cassava, a basic commodity for them, and they had
doubled the output of the cassava in a few years time. They had
new water supply systems, and these were, of course, wells,
simple, just wells in the middle of a town. Before, the mothers
would have to travel for miles to get water out of a river
which was usually polluted. And now, they did not have to
travel so far. They could spend their time on more productive
ventures, and the water that they had was pure. It did not
cause them to get sick all the time.
These sorts of things do not always show up in the
statistics. They take a long time to filter up and to spread,
and maybe impact on, the global economy of that particular
country.
Malawai and Zambia--I have not been there, so I cannot give
you a very precise answer. But what I can tell you is that one
of the problems with aid deliveries in the past has been the
question of ownership. Too often the countries did not really
feel that they owned the activities that were being financed by
the external donors because too much of the time they were the
donors' preferences and priorities and not the local people's
preferences.
I think an important thing about the Malawai and Zambia
experience is that civil society is having a major role which
they did not so much have in the past. They are really
influencing the shape of the programs, and more than that, they
are able to monitor what happens.
Now, even in the HIPC program, it is too early to have any
solid measures of outputs. You are really stuck, for the time
being anyway, mostly with input measures, but the input
measures are good. I mean, the fact that so many more school
children are attending primary school in Uganda, I think that
is a major accomplishment. All the donors that I am aware of,
they have programs for teacher training, for improving the
curriculum.
In Nigeria, we financed 1 million textbooks, which were
geared to the local environment, for example, to primary school
children. So the input side, I think, is important, and I am
confident that we are going to see some good output measures,
output coming out of all of this.
Now, again, I think the development agencies also are
improving their techniques for measuring outputs, and I think
that is a positive sign.
Mrs. Biggert. The gentlewoman from New York, Mrs. Maloney,
is recognized for 5 minutes.
Mrs. Maloney. I have a question for Tom Hart on the ability
to pay.
Last year, in the Global Aids Act of 2003, the United
States committed to seek deeper multilateral debt relief. The
current enhanced Heavily Indebted Poor Countries Initiative
sets 150 percent debt-to-export ratio as the index of debt
sustainability.
Secondly, the Administration has yet to implement the 10
percent of fiscal revenue measure of ability to pay. So Mr.
Hart, and GAO, Mr. Flood, if you would like to comment, can you
elaborate on these two measures of ability to pay and, more
broadly, in your opinion, has the Administration, the
Government, complied with the mandate in the Global Aids Act to
seek deeper debt relief?
Mr. Hart?
Mr. Hart. Thank you. I can answer the last question fairly
quickly, which is, not yet. And again, this hearing, I hope,
will spur the Administration to consider the recommendation the
Congress gave them in the AIDS law, building upon the enhanced
HIPC framework, in beginning to seek deeper relief for these
qualified countries.
The primary motivation of this legislation is to change, as
you said, from 150 debt stock-to-export ratio, which is really
in the weeds, and I apologize. Very quickly, the reason for
that is, I mean, it is an arbitrary level. All of these numbers
are fairly arbitrary. But one assumes that you would need
exports, hard currency, in order to pay off international debt.
So the notion was, great, we need to earn money from exports
and that will be somehow related to our ability to write off
international debts.
The problem with that measure, of course, is not only is it
too high, but exports, as GAO has mentioned, are incredibly
susceptible to shocks and commodity prices change. Uganda,
which was our star performer under the enhanced HIPC framework,
for a time actually became unsustainable under their debt
portfolio because coffee prices went through the cellar. So no
matter how well you are doing, your debt sustainability is
overly affected by this.
So the notion in the legislation was to more directly apply
debt relief or to relate debt relief to a country's ability to
pay. These countries were spending 25, 30, 40 percent of their
government budgets on interest on their debts. We were saying,
no, that is a silly investment of this poor country's money.
They should be spending it on putting their girls in school and
digging clean water wells. So that is what this legislation
tries to do.
As I mentioned earlier to Mr. Frank's point, the
legislation actually does give the Treasury the flexibility to
design another similar type mechanism if that one is flawed in
some way.
Mr. Melito. I would just like to add that, how to measure
the sustainability has been a challenge since the initiative
was created. There are weaknesses in every measure they have
suggested, but the World Bank and IMF are actually looking at
trying to address all of these concerns. Whether or not
something will emerge remains to be seen, but they do recognize
that there is no perfect measure.
Mr. Flood. I was just only going to add the fact that there
is a real concern about the countries particularly that are
suffering from HIV/AIDS. They really need to maximize the
amount of their domestic resources they can use to fight that
terrible scourge. That is part of the motivation behind the new
legislation.
Mrs. Maloney. I would like to ask a question about Iraqi
debt, and even though they are not a HIPC country, there is a
lot of effort and focus on Iraq. And I really applaud the
Administration's efforts in Iraq for debt relief.
But I am concerned that by gaining only partial debt
relief, and I have legislation in with Congressman Leach that
would really erase all of these debts, with IMF and the World
Bank taking the leadership role in that by reducing and erasing
their debt first. But I am concerned that by gaining only
partial debt relief, the value of outstanding debt may actually
increase as the chance that countries might be paid for some of
their debt increases. And I am concerned because I do not
believe the Iraqi people should be saddled with Saddam's debts,
particularly when they were odious debts spent for arms and
palaces.
And certainly, I do not think that the American people
should be sending aid for reconstruction to Iraq that may end
up paying for debts that were incurred by the former regime.
Can you, Mr. Hart, address whether you believe the value of
Iraqi debt outstanding may increase as partial debt relief is
accomplished? And again, GAO, Mr. Flood, if you would like to
comment?
Mr. Hart. Well, let me handicap myself by saying I am not
intimately familiar with the Iraqi debt case. But of course,
you are describing a scenario which seems plausible, which is
that as the Iraqi debt is lowered--and this is true for HIPC
countries as well--what remains becomes more payable.
Therefore, the discount value of that debt shrinks. You are
more likely to have to end up paying off the face value than
you were before.
Now, I do think the Iraqi debt case presents an interesting
example, of course, and lessons to be learned as we look at
other debt relief for other countries, which is that, indeed,
when Saddam took on all of these debts and now he is gone from
power, the country is left burdened with the debt. And that is,
in fact, the case with many of these African countries, many of
these HIPCs. Dictators long ago have been replaced in some
cases, and in many cases, surprisingly, by multi-party
democracies, but being sovereign nations, they absorb the
history left behind by corrupt dictators.
One of the notions of Jubilee 2000 and this enhanced HIPC
initiative was the idea of providing a clean slate, giving them
a fresh start, indeed for some of the very reasons that you
cited.
Mrs. Maloney. Just very briefly, I would like to ask GAO,
why in the world did you intertwine the two issues? The HIPC
program is directly focused on poverty alleviation. Helping
countries to get a level of sustained economic growth is a
larger, far more complex question. Why did you combine the two
when that really is not what the HIPC program is, and the
amount, as Mr. Frank mentioned, is astronomically larger when
you put the two together? So I am just curious about your
thinking on that.
Mr. Melito. Sure. If you agree with the assumption that the
export growth rates are overly optimistic--and most people do,
and even the World Bank itself is agreeing that their growth
rates are too optimistic--you then have to come up with an
alternative set of rates. And we chose to use historical, and
maybe something a little higher would be what someone else
would use. But if you use lower rates, you suddenly find very
large gaps emerge in the amount of resources these countries
have available. Some of it is exports; some of it is debt.
If we were myopic about the issue and just reported how
much their debt component was, we would be missing most of the
story. And we were concerned about how to present the story,
and I think we were very careful in how we wrote the report in
making those different components clearly distinct of each
other.
But if we just reported the $8 billion without reporting
the export shortfall, I think we would be susceptible in a
legitimate sense of missing the whole story or missing a big
part of the story, so we had to report them both.
Mrs. Maloney. Thank you very much.
I ask unanimous consent to place in the record the opening
statement of Barbara Lee.
[The following information can be found on page 41 in the
appendix.]
Mrs. Biggert. Without objection, so ordered.
Now, the gentleman from Texas, Mr. Bell.
Mr. Bell. Thank you, Madam Chair.
I would like to thank the panel for your testimony here
today. I just have a couple of questions. First, for Mr.
Melito, and it is really a follow-up to something you were
discussing with Congressman Frank regarding the situation
involving China. You pointed out that all of these projections
are somewhat difficult. But looking at China and realizing that
its bubble could burst at some point and its demand for
developing world exports could be greatly diminished, is there
any way for you to tell us here today how that might impact
some of the projections in your report?
Mr. Melito. I want to be quite clear that we actually do
not look at that level of detail, although those are one of a
number of factors which create the vulnerability which these
countries face in export growth. There are many reasons,
including potentially a particular market that was open to them
now closing. China right now has been increasing its demand for
certain commodities, and we do not know if that will sustain
overtime.
Mr. Bell. So it would be fair to say, any situation like
that would impact and could impact your numbers?
Mr. Melito. When we used 20 years of historical rates, we
wanted to basically cover good years and bad years. If you look
at the history of these countries, there are a number of years
for many of these countries, 3, 4 years in a row where they had
very rapid growth. If you just cut off the story there, you
might say the problem is solved. But often those periods of
rapid growth are followed by periods of large declines that
persisted.
There are always circumstances. You point to a market that
opened up to them or something, but then something else
changed. We considered 20 years forward, which is what we did,
and the most representative is to go 20 years back.
Mr. Bell. I see.
Mr. Hart, in your report that you gave us, you point out,
on page 7, after talking about the debt legislation, despite
debt legislation being law for nearly a year, the
Administration does not pursue negotiations with international
partners to implement its provisions. I am sure you find that a
little bit alarming, and probably, the best folks to address
this question to would be representatives of the
Administration, but we do not have that opportunity today.
So I am just curious if you have been able to receive any
information on that particular topic as to why the
Administration has not pursued any negotiations.
Mr. Hart. There are reasons, and yes, we have spoken with
them about this. And their reasons are varied, including a
general sense, that at the boards of the Bank and the Fund,
there is not support for going further. Actually, DATA is an
organization that works not only here in the United States but
in London and other capitals around the world. And the sense to
improve the HIPC initiative actually is fairly strong, from our
perspective.
Fundamental to their critique is, as I mentioned earlier, a
feeling that tying debt relief to revenues is a disincentive to
collect taxes. If you have smaller revenues, then you owe less
debt.
Our response to that has been, as Mr. Flood indicated,
there is actually no evidence to suggest that that is what has
happened, that that sort of reverse incentive would take place.
But in response, the legislation described actually does try to
address that and say, come up with another measure that would
avoid that disincentive to collect revenues.
Third, and I think most importantly, and it is cited both
in Treasury's report and in GAO's testimony, is the funding gap
of the current initiative. They are hesitant to try to increase
the relief of the current initiative until it has been fully
paid for. And that is an understandable position. However, I
believe the way that both GAO and the Administration have
presented the shortfall case overstates the problem, and I do
not mean that lightly. I mean that the Administration, with the
donor community has already taken strides to meet that gap and,
as I testified earlier, the World Bank, if the World Bank will
continue to do what it has already been doing, that gap will be
substantially reduced.
I think, as a final point, I would just like to advocate
for the legislation. It was quite expensive to get rid of a lot
of the debt stock that was not being serviced. We got rid of
this huge amount of debt stock at a cost $30 billion, to which
the United States contributed $1 billion.
And we have just begun to get at some of the debt that was
being serviced, thus relieving resources on the ground for
building schools and wells. Every dollar that we put in from
now on, because these countries are actually paying this debt
back, actually generates benefits on the ground. So the return
for the countries now is amplified if we take it an incremental
step further.
Mr. Bell. I just have one last question, and I will begin
with Mr. Flood. And I guess this is really one of the major
questions that needs to be resolved and is somewhat of a
follow-up to what Mr. Feeney was saying.
I certainly understand the need for this debt relief and am
fully supportive of it. But I think we all fear becoming a
precedent or an example and that countries will look on future
borrowing as somewhat artificial borrowing, that at some point,
there will be enough political pressure brought to bear in the
United States and across the globe to forget the debt, and it
just becomes a recurring situation.
I am just curious what recommendations you all have to keep
that from happening and keep that from becoming the situation.
Mr. Flood. Well, there are many, many aspects to that. I
think one is that the countries have to continue to try to
address better their development problems. I think that we see
evidence through this HIPC program of some advances in that
direction. I mean the basic challenge is for the countries
themselves to strengthen their economies in a way in which they
can develop their creditworthiness to continue to be able to
borrow.
On the moral hazard issue, I think that there are several
ways to address that, but I think that the best one for these
very, very poor countries is to consider a larger percentage of
grant financing. I think they are going to have to have that.
It would be nice if we could say, it should all be grants, but
I do not think the donors are that generous, that the entire
amount that they need would be able to be provided through the
grant process.
One thing that is encouraging, again in the HIPC program,
is that the expected levels of post-HIPC borrowing by these
countries has been quite modest. I mean, any kind of reckless
borrowing has not occurred since the HIPC program. As a matter
of fact, the Bank did the funding projections as to what they
anticipate a prudent level of borrowing for these countries
would be, and the numbers show that they are borrowing actually
less than that right now.
So there is more prudence. I think there ought to be a
larger percentage of grant financing in what they receive. The
poorest countries are going to, obviously, need more,
relatively speaking, than the more--well, they are not wealthy,
that is not the right word--but higher-income poor countries,
if we can call it that, would require.
Mr. Hart. Just briefly, to amplify that I completely agree.
It is not DATA's nor would I assume the Catholic Bishop's
intention to be here again in Jubilee 2050, to keep coming back
because we have gotten ourselves into this problem again.
I have to say that the Administration ought to be applauded
for their initiative in trying to convert some of these loans
to grants. It makes absolute sense, and we have supported it.
And it is trying, in fact, to address that prospective problem,
trying to avoid getting back into it.
What we have not sufficiently dealt with are the problems
of the past. We are still cleaning up some of that mess and
have some work to do. They are complementary ideas meant to
keep the poorest countries from being burdened by an
unsustainable debt level.
Mr. Melito. As we discuss in our report, the mix of the
optimum level of grants for each country results in basically
the loans they do take being ones that they should be able to
repay. So it does provide an open and honest bookkeeping
process, so they get grants in those areas where they cannot
pay and loans for the resources they can repay.
Mr. Bell. Mr. Hart, I think it is completely fair to say
that it is not Mr. Flood's intent to be here in 2050 discussing
this same subject.
Mr. Flood. Oh, but I beg to differ.
Mrs. Biggert. Thank you very much.
We will have another round, I guess.
Let me ask again, Mr. Melito, recent World Bank research
suggests that debt thresholds are dynamic, and specifically,
they indicate that countries that advance and improve their
policies and institutions will be able to sustain higher levels
of debt.
Do you agree with this analysis? And is this concept
included in the report's projections, or do the GAO projections
assume that all countries' official sector debt is equal?
Mr. Melito. The report uses the agreed-upon measure for
HIPC, which is the 150 percent debt-to-export ratio, which my
colleagues discussed previously.
But as I mentioned earlier, there are other possible
measures, and the World Bank and IMF are exploring those
measures, but they are not policy yet. If they actually ever
change the initiative, we would probably in future work
integrate that, but it is not the policy yet.
Mrs. Biggert. Okay. Then the World Bank this year published
research providing a substantially different assessment of
projected debt-to-export ratios through 2023. I am sorry we do
not all have a graph that shows the difference between the
historical and the baseline that they use, and it really does
show what Mr. Flood was just talking about, where it goes down
while the historic goes way up by 2023.
So that methodology that they show rejects the reliance on
historical data alone being appropriate to project the future
debt service burdens. Are you aware of this methodology?
Mr. Melito. Sure. They have, in recent years, the last
couple of years especially, been doing sensitivity analyses
where they have been trying to look at alternative rates lower
than optimistic levels, and I am familiar with that. We could
debate, and it is reasonable to debate what would be a
reasonable proxy for the future.
We have done our own analysis on the previous 10 years.
Well, if you use the previous 10 years, the average would be
4.5 percent compared to 3.5 percent for 20 years, still
substantially below what they project. They project over 7.5
percent, about 7.7 percent.
If you use the most recent 10 years, you would reduce the
burden to around $150 billion instead of $215 billion, and that
would be a nice, substantial change.
But the point is, their reliance on overly optimistic data
creates the impression there is no problem. They provide debt
relief at the completion point. They then show us these 20-year
projections, and countries look like they have no problems
moving forward.
Well, we think it would be much more realistic if they
actually used lower growth rates and showed that HIPC, while it
is very important and it has done a lot of good work, it is
probably not going to provide a permanent exit from debt
problems.
Mrs. Biggert. Well, would you say that methodology might
provide the Treasury with more flexibility?
Mr. Melito. This should be something that the Treasury and
the donors debate. I mean, it seems arcane on the surface what
growth rates should be used, but there are policy implications.
And it would probably be useful if the boards of the Fund and
the Bank actually put this on their agenda to decide for future
projections for HIPC countries. We should adopt some standard
or maybe report two or three, a low estimate and a medium
estimate and a high estimate. But their official projections
only use what I consider a very high estimate.
Mrs. Biggert. If I might, I would submit the question for
the record and perhaps you could give the GAO views on the
merits of using the historical projections to assess HIPC needs
relative to the World Bank methodology.
[The following information can be found on page 98 in the
appendix.]
Mr. Melito. Sure.
Mrs. Biggert. Then my next question is that I understand
that the World Bank is exploring innovative use of financial
instruments and other methods for helping HIPC countries hedge
their exposure to the commodity price risk and thus stabilize
their export sector.
What are your views on using the hedging instruments to
decrease exposure to commodity price volatility?
Mr. Melito. That is not something that we looked at, and I
really would like to look very closely at it before I could
comment on that.
It does seem like it would be difficult limiting it to poor
countries because you would normally want to involve the
private sector, and I do not know exactly how they would
involve the private sector in these transactions. But if they
have a paper about this, we could review it and potentially
make comments.
Mrs. Biggert. And assuming that these instruments could be
used for hedging, I would suppose then that estimates in the
GAO report would need to be adjusted?
Mr. Melito. Well, again, the paper would be theoretical. I
would like to see their plan and then ascertain whether it is
feasible to implement such a plan.
Mrs. Biggert. Okay. Thank you. I see everybody has left me.
Would you like to comment on that Mr. Hart or Mr. Flood?
Mr. Hart. I do not think I have a specific reaction to your
questions. They are largely theoretical and ones that I do not
have a good answer to.
But I would like to just comment briefly again on GAO's
report. Actually, I have very little argument with the
assumptions that they have made about growth rates. The World
Bank and IMF, as stated earlier, agree that those are
optimistic.
I guess what I would challenge is the way that it is
presented to the Committee, as though $375 billion is needed to
make debt relief successful. That is not the question; that is
neither the purpose of the HIPC debt initiative, nor do I think
that necessarily helps the Congress or this Committee grapple
with the issues of HIPC that are before it.
It also, I would just reiterate, counts money we are
already spending. It also is an 18-year figure and global
figure, not just the U.S. share.
In my written testimony, I went through the calculation--
and I believe you said in your opening statement--that could
roughly translate into $2.8 billion for the United States.
Well, if you look at the global AIDS initiative, the
Millennium Challenge Account, existing bilateral development
and multilateral development assistance that we give, as well
as export financing to poor countries, we give a lot more than
$2.8 billion already. So what this analysis does not, nor could
it, provide is an assessment of what actions Congress might
take and really the state of health of the HIPC initiative
moving forward.
Mrs. Biggert. Thank you. That really goes back to my first
question, which was, were these other factors really accounted
for in this report? And the answer I guess was, yes, and yet I
cannot figure out how that figures in, looking at that number.
Mr. Hart. Well, I do not want to answer on behalf of GAO,
but my understanding of their analysis is they took the World
Bank estimate that the global community would provide. Fair
enough. That seems logical. It does not assess what the United
States actually has given or plans to give in development
assistance moving forward.
Mrs. Biggert. All right. Thank you.
Mr. Flood, do you have any comments?
Mr. Flood. No. It is just that I think as I recall--and
this may have changed, I have not been in the Bank for quite a
few years--but what they used to do is to estimate a reasonable
growth rate for these countries. In some respects it would have
a certain optimism in it so that one could know that we were
talking about countries that were on an upward path, moving
towards a higher level of development. And then they would
determine what are the financial implications of that in order
to achieve that particular growth rate. And then they would
fill the amount in, and that is where you get your numbers.
It comes out of starting with a growth rate which you think
is realistic based on various parameters, and then you fill in
the financing plan that is required to get there.
I am not at all an expert in this area, but I would say
that I am pleased to see that the World Bank, in response to
this GAO report, admits that their export projections have been
too optimistic in the past. I think that is an important point,
that they recognize that fact.
I think that perhaps just extrapolating from the past is
too pessimistic. I remain more optimistic that the countries
will be able to move forward to a situation where, through
export diversification and other measures, plus some support
from the outside on trade measures, that they will be able to
reduce their export volatility more than is implied by just the
historical rate of growth of exports.
Mrs. Biggert. Okay. In the past then, the Department of
Treasury underscored the importance of distinguishing between
debt relief, which would be defined as to include only
decreased debt service burdens and broader development goals.
Would such a distinction imply that the majority of the
estimated costs presented in the GAO report would not be
appropriate when considering debt relief?
Mr. Flood. Well, I think that what I got out of it all is
that one has to say that debt relief is only one part of the
total picture, and it is important, but far from sufficient.
You have to look at a lot of other types of assistance,
changes in policies as a whole, a large number of different
issues which must be taken into account in order to project out
what the total package is that is required. But clearly, there
are different types of instruments, different items on the
agenda which have different financial implications that go well
beyond what you can ever expect from a debt relief program.
Mrs. Biggert. Thank you.
Well, seeing that no other questions or questioners--I will
note that some Members may have additional questions for this
panel which they may wish to submit in writing.
Without objection, the hearing will remain open for 30 days
for Members to submit written questions to these witnesses and
place their responses in the record.
Mrs. Biggert. I thank you all for being here, your time and
your expertise and being part of this panel.
With that, this hearing is adjourned.
[Whereupon, at 4:10 p.m., the subcommittee was adjourned.]
A P P E N D I X
April 20, 2004
[GRAPHIC] [TIFF OMITTED] T4515.001
[GRAPHIC] [TIFF OMITTED] T4515.002
[GRAPHIC] [TIFF OMITTED] T4515.003
[GRAPHIC] [TIFF OMITTED] T4515.004
[GRAPHIC] [TIFF OMITTED] T4515.005
[GRAPHIC] [TIFF OMITTED] T4515.006
[GRAPHIC] [TIFF OMITTED] T4515.007
[GRAPHIC] [TIFF OMITTED] T4515.008
[GRAPHIC] [TIFF OMITTED] T4515.009
[GRAPHIC] [TIFF OMITTED] T4515.010
[GRAPHIC] [TIFF OMITTED] T4515.011
[GRAPHIC] [TIFF OMITTED] T4515.012
[GRAPHIC] [TIFF OMITTED] T4515.013
[GRAPHIC] [TIFF OMITTED] T4515.014
[GRAPHIC] [TIFF OMITTED] T4515.015
[GRAPHIC] [TIFF OMITTED] T4515.016
[GRAPHIC] [TIFF OMITTED] T4515.017
[GRAPHIC] [TIFF OMITTED] T4515.018
[GRAPHIC] [TIFF OMITTED] T4515.019
[GRAPHIC] [TIFF OMITTED] T4515.020
[GRAPHIC] [TIFF OMITTED] T4515.021
[GRAPHIC] [TIFF OMITTED] T4515.022
[GRAPHIC] [TIFF OMITTED] T4515.023
[GRAPHIC] [TIFF OMITTED] T4515.024
[GRAPHIC] [TIFF OMITTED] T4515.025
[GRAPHIC] [TIFF OMITTED] T4515.026
[GRAPHIC] [TIFF OMITTED] T4515.027
[GRAPHIC] [TIFF OMITTED] T4515.028
[GRAPHIC] [TIFF OMITTED] T4515.029
[GRAPHIC] [TIFF OMITTED] T4515.030
[GRAPHIC] [TIFF OMITTED] T4515.031
[GRAPHIC] [TIFF OMITTED] T4515.032
[GRAPHIC] [TIFF OMITTED] T4515.033
[GRAPHIC] [TIFF OMITTED] T4515.034
[GRAPHIC] [TIFF OMITTED] T4515.035
[GRAPHIC] [TIFF OMITTED] T4515.036
[GRAPHIC] [TIFF OMITTED] T4515.037
[GRAPHIC] [TIFF OMITTED] T4515.038
[GRAPHIC] [TIFF OMITTED] T4515.039
[GRAPHIC] [TIFF OMITTED] T4515.040
[GRAPHIC] [TIFF OMITTED] T4515.041
[GRAPHIC] [TIFF OMITTED] T4515.042
[GRAPHIC] [TIFF OMITTED] T4515.043
[GRAPHIC] [TIFF OMITTED] T4515.044
[GRAPHIC] [TIFF OMITTED] T4515.045
[GRAPHIC] [TIFF OMITTED] T4515.046
[GRAPHIC] [TIFF OMITTED] T4515.047
[GRAPHIC] [TIFF OMITTED] T4515.048
[GRAPHIC] [TIFF OMITTED] T4515.049
[GRAPHIC] [TIFF OMITTED] T4515.050
[GRAPHIC] [TIFF OMITTED] T4515.051
[GRAPHIC] [TIFF OMITTED] T4515.052
[GRAPHIC] [TIFF OMITTED] T4515.053
[GRAPHIC] [TIFF OMITTED] T4515.054
[GRAPHIC] [TIFF OMITTED] T4515.055
[GRAPHIC] [TIFF OMITTED] T4515.056
[GRAPHIC] [TIFF OMITTED] T4515.057
[GRAPHIC] [TIFF OMITTED] T4515.058
[GRAPHIC] [TIFF OMITTED] T4515.059
[GRAPHIC] [TIFF OMITTED] T4515.060
[GRAPHIC] [TIFF OMITTED] T4515.061
[GRAPHIC] [TIFF OMITTED] T4515.062
[GRAPHIC] [TIFF OMITTED] T4515.063
[GRAPHIC] [TIFF OMITTED] T4515.064
[GRAPHIC] [TIFF OMITTED] T4515.065
[GRAPHIC] [TIFF OMITTED] T4515.066
[GRAPHIC] [TIFF OMITTED] T4515.067
[GRAPHIC] [TIFF OMITTED] T4515.068